Chief Economists Forum Debrief

In early April, Lifestyle Financial Services attended the Financial Standard Chief Economists Forum.   At this annual event, leading economists discussed geopolitics, the ongoing impact of COVID-19 and the outlook for local and global economic growth.

This year’s panel consisted of: Chris Andrews, Chief Investment Officer and Deputy Chief Executive Officer, La Trobe Financial Robert Tipp, Chief Investment Strategist, PGIM Fixed Income Ben Powell, Chief Investment Strategist, Asia Pacific, BlackRock Sally Auld, Chief Investment Officer, JB Were Danielle Wood, Chief Executive Officer, Grattan Institute This article provides a summary of their outlook for interest rates, inflation and asset classes including equities, bonds and property.    

War, politics and the economic outlook  

Three key themes will shape the global economic recovery in 2022: Russia-Ukraine war; Ongoing impact of COVID-19; and  Mindset of the central banks. The general consensus is that the outlook for global growth remains strong, despite significant challenges. As such, central banks will raise rates in 2022.  

According to Robert Tipp, Chief Investment Strategist, PGIM Fixed Income, the economic recovery still has “more to go” with business activity set to increase off the back of reinvigorated domestic and international travel and a greater focus on spending over saving for retirement.

Tipp predicted interest rates will rise to 3% in the United States and Australia.

“If growth continues, there will be more central banks turning away from accommodative policy. They know they’re 150-200 basis points (1.5% to 2%) away from where they want to be and when you move slowly, the market doesn’t respond as you want,” he said.

“It’s hard to (restrict) where this is going to end up but in the US, they will get to 3% and I wouldn’t be surprised if they get to 3% in Australia.”

Tipp said central banks were well aware of the risks of a hard landing and would move to orchestrate a soft landing.

“Global growth is strong and inflation is rising. Central banks will hike away. They have achieved what they wanted to achieve… They will raise rates but against a firm economy,” he said.

Investment management giant, BlackRock also expects central banks to begin withdrawing monetary support “as the restart does not need stimulus”, said the group’s Chief Investment Strategist Ben Powell.

“We see central banks starting to raise rates but remaining more tolerant of inflation.”

According to Powell, the recent spike in inflation will be short-lived, as supply chain bottlenecks clear up.

“We think inflation will come down because it is predominately a supply story,” he said.

“As more of the world opens up, we will see a normalisation of supply chains and inflation will come down and settle at around 2.5%. That is higher than what we’ve been used to but not too high.”

Tipp said the current inflationary market environment was critically different from the 1970s.

In the 1970s, when inflation in the United States accelerated from 2% to 14% over the decade and adversely impacted on economic policy, debt levels were relatively low, tax rates were relatively high and there was a younger demographic.

Today, debt is at record highs, taxation is relatively low and the population is rapidly ageing.

“There is an overarching long-term trend of an ageing population, which has bought down rates and that will be the case for the next 30 years,” he said.    

Portfolio Positioning  

Sally Auld, Chief Investment Officer at JB Were, acknowledged that it had been a difficult start to the year, with global equities and credit both falling around 7% and government bonds down almost 5%, for the three months to March 31, 2022.

However, investors should not panic just yet.

“Unless you think there’ll be a recession in the next 2-3 months, don’t do anything,” Auld said citing research by JB Were showing US equities have historically peaked three months before a recession.

“They (equities) should continue to do reasonably well, despite the challenges.”

That said JB Were is cautiously optimistic.

“We are getting to the more difficult part of the economic cycle so it makes sense to lower our sights on growth assets over the next 3-4 quarters,” she said.

Providing a snapshot on how JB Were’s portfolios are positioned, Auld said: It’s too early to underweight equities v government bonds; It’s not too early to be cautious on credit v equities; Extend duration within fixed income allocations; Lean towards quality within equity allocations; Increase allocation to gold; and Ensure exposure to real assets like property and infrastructure. BlackRock has flagged a potential new market regime, with how economists and analysts define and think about risk changing.

“We see 2022 heralding a new regime by delivering global stock gains and bond losses for the second year, this will be a first since (collecting) data started in 1977,” Powell said.

“This is a persistent backdrop that investors will need to respond to.”

Historically, there has been a low correlation between growth and defensive assets. In other words, when growth assets like shares have outperformed, defensive assets like fixed interest have underperformed and vice versa. As such, super funds and diversified portfolios contain a mix of both growth and defensive assets to help smooth out long-term returns.

But BlackRock’s Powell said government bonds no longer gave investors what they used to.

“Our work shows that government bonds historically offer less diversification during period of supply-driven inflation,” he said.

In terms of strategic asset allocation, BlackRock’s portfolios are slightly overweight equities and underweight credit and government bonds.

“The early 2022 (equity market) sell-off created an opportunity for long-term investors as we see the combination of low real rates, strong growth and reasonable valuations as favourable for equities,” he said.

“Incorporating climate change in our expected returns brightens the appeal of developed market equities given the large weights of sectors such as tech and healthcare in benchmark indices. Tactically, we are overweight equities amid solid economic fundamentals and historically low real rates.”  

“We are underweight credit on a strategic and tactical basis against a backdrop of rising long-end rates and high valuations. We prefer to take risk in equities instead. We are also strategically underweight nominal government bonds given their diminished ability to act as portfolio ballasts with yields near lower bounds.”    

What about Australia?  

Despite the challenges, the Australian economy continues to defy gravity and outperform.

For the past two years, Australia has outperformed in almost every data set including GDP growth, unemployment, consumer spending and housing starts.

Josh Frydenberg’s fourth budget could be considered a triumph, with the nation’s net debt expected to be $632 billion by June 2022, compared to last year’s forecast of $729 billion.

Budget documents show the underlying cash balance has improved $38.1 billion in 2022-23.

More money has been allocated to defence, infrastructure and the National Disability Insurance Scheme.

According to Chris Andrews, Chief Investment Officer and Deputy Chief Executive Officer, La Trobe Financial, the Australian economy is in significantly better shape than expected and the outlook for growth is strong with solid GDP growth, historically low unemployment and the official cash rate still relatively low by historical standards, despite trending up.

While the Russia-Ukraine war and rising inflation and interest rates present headwinds to growth, Andrews cited tailwinds including: Strong household balance sheets; A pick up in migration; and Australia’s abundant natural resources. “Australia is a lucky country. We are unbelievably positioned to benefit from the transition from fossil fuels to green energy… due to our large deposits of new energy materials and the most advanced mining sector to extract them,” he said.

Danielle Wood, Chief Executive Officer, Grattan Institute agreed that Australia was not at risk of a recession or financial crisis with consumer confidence high, unemployment low and increasing investment.

However, Wood said conditions were ripe for rates to rise faster and sooner.

She pointed to significant challenges ahead for the government in the medium term, voicing concerns that government spending was normalising at a level higher than historical averages, coming out of COVID-19.

Heading into an election, Wood listed the three major challenges for the next government as: Huge structural budget challenge – ageing population, client change and increased pressure on defence spending; Uncertainty around productivity growth; and Neither side of politics demonstrating an appetite for structural repair or broader economic reform. “Productivity has been flat-lining for the best part of 15 years. We’ve had 20 years of very little by way of structural reform and, once we get past this election, I’d like to see serious discussion about these issues,” she said.     

How can we help you?
If you would like to discuss any of the themes addressed in this article or talk about how your superannuation and investments are positioned, please contact us:

Email – [email protected]
Phone – 1300 349 188.
0/5 (0 Reviews)